In wireless, be careful of next big thing

Commentary: The future may cost more than it delivers

WASHINGTON (MarketWatch) -- The buzz in wireless these days centers yet again on the promise of "next generation" technologies, but investors should be wary of the hype. We've heard it all before.

That's the view of consultant Jane Zweig, one of the shrewdest observers of the mobile industry for more than a decade. Zweig, who runs The Shosteck Group, is one of thousands who've gathered in Las Vegas this week for the nation's biggest wireless trade show.

Much of the show's focus is on the future: namely, the pending move to "Fourth Generation" mobile networks designed to deliver ultra fast Internet access.

Sprint Nextel Corp.
S, -2.97%
aims to launch the first 4G network based on WiMax technology by the end of 2008. AT&T Inc. and Verizon Wireless, which plan to use a competing technology known as Long Term Evolution, are expected to wait until 2010 or 2011.

Yet to Zweig, the benefits of so-called 4G technology resemble the arguments in favor of existing 3G networks, whose payoff has largely been unmet. More traffic is being funneled through wireless networks, but not necessarily more revenue or profit per user.

'This industry always gets hyped up about new technologies, but all of these big ideas are expensive, and they require lots of little things to be in place first.'
Jane Zweig, The Shosteck Group

"This industry always gets hyped up about new technologies," Zweig said from Las Vegas, "but all of these big ideas are expensive, and they require lots of little things to be in place first."

As a result, she expects most wireless phone companies to show more caution in their spending on 4G networks, an approach that could hamper efforts by big vendors such as Alcatel-Lucent
ALU, +0.00%
and Nortel Networks Corp.
NT
to recover from years of sluggish demand.

The most pressing concern of carriers, Zweig said, is to keep current users from defecting to rivals in the hotly competitive U.S. mobile market. That means improving customer service, churning out cool new phones and making handsets even easier to use.

She said the biggest beneficiaries of a focus on better service, aside from customers themselves, are likely to be small vendors that develop innovative software in areas such as device management, network authentication and location-based services.

Looking at wireless from the viewpoint of customers, Zweig said, is the reason why her firm has often been ahead of the curve. Shosteck Group, for example, was bearish from the outset on multibillion-dollar efforts in the 1990s by Iridium and Globalstar to build mass-market satellite-phone service.

More recently, Zweig predicted Motorola Inc.
MSI, -0.61%
would look to get rid of its wireless-handset unit several months before the company publicly announced that step. The move caught most Wall Street analysts by surprise.

Industry nears crossroads

It's easy to see why there's less talk by the wireless industry about the here and now, particularly slumping equipment vendors. For one thing, the slowing economy has everyone on edge. Executives are peppered at every public event about whether they see a drop-off in customer spending.

What's more, most Americans already own a wireless device and the number without one is dwindling fast. That's why the development of new money-making services is viewed as so important -- and why faster networks are seen as essential.

Speedier Web connections, it's believed, would spawn a raft of new devices and services to keep profits flowing as the growth in new customers tapered off.

In some ways, that's what happened. Devices such as the Apple iPhone have broken the wireless mold and all sorts of new services are available, such as over-the-air music downloads, satellite navigation and even the ability to use a phone like a credit card.

Yet the payoff for all the investment hasn't fully materialized. Indeed, the money spent by wireless customers each month has barely changed since the advent of 3G networks several years ago.

At AT&T
T, -0.07%
for example, wireless customers spent an average of $50.28 at the end of 2007, up just 1.2% from $49.67 at the end of 2004.

In that same span, the average Verizon Wireless user has only increased monthly spending 2.3% to $51.49 from $50.32. Verizon Wireless is owned by Verizon Communications Inc.
VZ, +0.70%
and U.K.-based Vodafone Group plc.
VOD, +0.68%

While customers are using more data services such as text messaging, the gain in revenue has barely offset the overall decline in wireless prices caused by intense industry competition.

Another problem, Zweig said, is that consumers are put off by complicated pricing schemes that make it hard for them to manage bills. Most customers dislike incremental fees and they want to know what they have to pay upfront.

So far, however, those all-you-can-use monthly plans only apply to high-end customers willing to pay $100 a month. They represent just a tiny fraction of the market.

In the meantime, phone companies are scouring for new ways to generate revenue, especially from third parties such as advertisers. Customers are expected to increasingly rely on mobile phones to find nearby restaurants or stores or places where they have appointments.

Yet Zweig warns that consumers will never accept the amount of incoming spam and junk mail on their wireless phones as they do on their home computers.

"Mobile advertising has a place," she said. "The problem is finding that right model -- if there is a model."

While searching for the next big idea, Zweig said carriers and their investors would do well to remember what made them successful in the first place.

"Wireless operators are basically big pipes. We said that a decade ago," she noted. "You can make money from carrying traffic. Be a really good pipe."

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